Accountancy firms set to reshape legal market

Big Four accountancy firms Deloitte, EY, KPMG and PricewaterhouseCoopers (PwC) are getting ready for a second coming in the UK legal market.

Earlier this year PwC’s law firm PwC Legal gained SRA approval to convert to an alternative business structure (ABS), meaning PwC itself is now effectively an equity partner in the law firm. EY and KPMG, meanwhile, are hiring lawyers for their regional bases, while Deloitte has appointed a new head for its legal arm who has put entry into the UK legal market top of his agenda.

But why does this matter? To answer this question it is vital to look at the accountants’ first foray into the legal sector and examine how the market has changed since.

Before there was a Big Four there was a Big Five, with now-defunct Arthur Andersen alongside the present four. Andersen was the first to spot how offering a one-stop advisory shop to clients on matters such as business restructurings could be lucrative – rather than the client having to instruct an accountant and a solicitor, Andersen could do it all.

Andersen set up law firm Garretts in the mid-1990s for this purpose, bringing Edinburgh-based Dundas & Wilson (now part of CMS) on board in 1997. Its rivals were quick to follow, with Price Waterhouse, as it was then, starting its own legal brand, Arnheim & Co, in 1996 and Coopers & Lybrand setting up Tite & Lewis in 1997.

When Price Waterhouse and Coopers & Lybrand merged in 1998 the legal brands also combined, but in 2000 Tite & Lewis broke off to join EY and what was left at PwC rebranded as Landwell.

By 2001 KPMG had entered the fray, signing a deal with the London arm of Scotland’s McGrigors (now Pinsent Masons), whose City branch rebranded as KLegal, leaving Deloitte & Touche as the only one of the Big Five with no standalone legal arm in the UK.

Where did it all go wrong?

Although the purpose of the accountants’ own legal arms was to capture all the legal work related to their clients’ other advisory work, it didn’t work out like that.

For one thing, referrals are difficult to put in place – an accountant who has referred work to a particular lawyer for 15 years will not find it easy to break that relationship.

As one legal market source says: “Referrals are the Holy Grail, but no one does it particularly well. It’s difficult to get people to cross-sell.”

The other issue was that at the turn of the millennium, law firms, and City firms in particular, were doing better than the accountants in profitability terms, so it was difficult for the Big Five to attract the talent they needed to build a really strong legal offering.

“People were very snobby last time around,” says the source. “The lawyers were looking down on the accountants.”

Whether the accountants would have been able to overcome these hurdles is a moot point because at the end of 2001, energy corporation Enron filed for bankruptcy, ultimately signalling the end for the accountants’ foray into the legal sector. Andersen had been Enron’s auditor and, when a $100bn accounting fraud was uncovered at the company, the accountancy firm faced criminal charges and it was discovered that staff had shredded documents relating to its auditing of Enron.

Although Andersen was eventually cleared, the reputational damage destroyed its business. Deloitte rescued the UK auditing arm but did not want Garretts, which, with its funding source gone, was forced to close.

Increased regulatory concern over financial links between audit firms and their associated businesses led KPMG to disband KLegal, while Tite & Lewis split off from EY before being subsumed into Lawrence Graham (now Wragge Lawrence Graham & Co). PwC was the only one of the remaining Big Four to stay the course, rebranding Landwell as PwC Legal in 2006 before finally gaining an ABS licence this year.

Renewed appeal

Hardly an auspicious start, so why would the accountants want to try their hand at legal again? And why should the legal sector care? Put simply, things are now different.

In the 10-plus years since Andersen’s demise, some mid-market firms such as Halliwells and Manches have gone to the wall, while others such as Dundas & Wilson and Lawrence Graham have merged to escape an ever-more squeezed patch.

The Big Four, meanwhile, have grown their profitability to very decent City law firm levels. Then, of course, there are ABSs, which mean lawyers joining the audit firms rather than their legal arms would only have to give up their practising certificates until a jointly-owned law firm could be spun out.

The result? The accountants are looking pretty attractive, as shown by EY’s hire of Addleshaw Goddard corporate managing partner Phillip Goodstone, former Berwin Leighton Paisner finance chief Matthew Kellett and Freshfields Bruckhaus Deringer global people partner Richard Norbruis, and KPMG’s hiring of DLA Piper partner Nick Roome. As attitudes in the industry have also changed over the past 10 years, these hires are unlikely be the last.

“Lawyers now know their firms aren’t that special,” says a source. “Last time law firm partners were earning more than Big Four partners, but over the past 10 to 15 years the Big Four have become highly profitable. They can compete in a way that wasn’t the case back then.”

As PwC Legal senior partner Shirley Brookes says, now her firm has the regulator’s blessing to work hand-in-hand with PwC itself, pitching for work is a lot easier.

“Our value proposition is that we go to market with a PwC team,” she says. “We’re not just trying to get an M&A job – we’re going to market with a multi-disciplinary angle, otherwise we’d be out there with every lawyer in London.

Becoming an ABS was a no-brainer for us. That’s why we came into existence 18 years ago – to go to market together and develop relationships together.”

Now that PwC has done the hard work with the SRA, it should be easy for the other accountants to gain ABS licences, and EY and KPMG are almost certain to do so. They may not be quite there yet, but the accountants are coming and they could prove a force to be reckoned with.